The ‘Free Market’ Problem

As often is the ironic truth, failure stems from success. When communism fell, we thought it was capitalism that triumphed. But with the severity of financial crashes, lurid accounts of corporate wrongdoing, unsustainable inequalities and increasingly volatile commodity prices all point in one direction.

Declining private sector growth through the entire capitalist world has for years been patched up by governments that allow their financial institutes to lend and borrow well in excess of economic growth in order to win elections and to fuel a materialist ‘feel-good factor’ in big business and investment institutions to stimulate their high return, short term wants. The irony is, governments will then cheat on their own free-market ethics and bail out banks with public money.

Factors like currency issues or national culture have been used to explain the crisis in countries like Greece and Ireland, but the same scenario played out in a ‘stronger’ America economy in an almost identical fashion to that of ‘weak’ European economies. The root cause of the Eurozone and American debt crisis is the same – capitalism which recognises no national borders in its quest to make short-term profits for a small minority.

The assumption that capitalism is the be-all and end-all of human existence, rather than a means to create and fund enterprise is the cornerstone of where the West’s problems lie. US free-market theory that has gripped most of the economically advanced world does not self-produce the ‘best’ outcomes and capitalism is in danger of rotting out its moral core and destroying itself from within. Unregulated capitalism is nothing more than a problem than needs to be fixed

 Now free-market economists will jump up and down and argue that a government patching up markets is the reason for the failure of capitalism; government should leave firms that are failing alone and allow market forces to take their course. But the major tenet of free-market economics – that unregulated markets will of their own accord find un-improvable results for all participants – is nonsense. Market forces are ‘red in tooth and claw’ and when unregulated they will lead only to the survival of the fittest monopoly, despite economists claiming markets free of regulation will lead to a thriving and competitive economy.

 The free-market equilibrium theory – the belief that the price mechanism will dictate price based on the laws of supply and demand – is nothing but a utopian fantasy that in reality is not even close to being achieved, as Roy Radner discovered. Radner set out to prove that a market equilibrium point could exist. He found the job impossible as free-market theory works off the bold assumption that every economic actor will have a computer-like capacity to explore all the consequences of the options open to them in the market, which is a logical impossibility. The demand for increased returns over time in future markets as well as evidence surrounding human incapacity to act rationally in economic decision making breaks down the theory that the free-market system is one that satisfies human needs and wants.

If markets work best when left to their own forces, why was it that when Mrs Thatcher privatised the manufacturing industry in the 1980s it went into a trade deficit for the first time since the Industrial Revolution?

Albeit the UK manufacturing industry when it was privatised did see improved labour relations, this only came through reduction of workers rights and structural unemployment that the privatisation programme produced and there was no increase in productivity to follow the ‘improved’ labour relations. Where there was an efficiency gain this mainly came through shedding labour due to reduced trade union legislation. Under the privatisation of the 1980s the UK saw growth in the wider economy keep pace with historical trends.

Since the 1980s profits in UK private firms have increased but the rate of return on investment has risen even faster in the deregulated banking industry that the Thatcher administration created, with banks caring only for their own short-term interest gains. It has been seen that the more market-based the financial systems the less effectively it mobilises resource for investment – both the short term interests of bank (to make a good interest return on loans as quickly as possible) and firm (to make a high profit at the lowest cost as quickly as possible) conflict paradoxically.

With recent growth in the 21st century UK economy slowing and reported to be heading into recession, along with suggestions that 1.6 million children live below the poverty line, the future of the nation looks bleak. Unemployment has risen to 2.49 million and the unemployment figures are made only worse by nearly one million of those unemployed being 16-24 year olds. The so called ‘nanny state’ that has been created and the dependence of many on the state as a source of income, derives only from deregulated capitalism’s search for cheap labour that minimises costs and maximises profits. This quest comes at the drastic cost of losing the skills of an entire generation and plunging the UK into a society of greater divisions both socially and economically. Most of the advanced economies in the world, along with Britain, need to change the way they allow their economy to be operated on a vague principle of ‘self regulation’. Markets must stop being labelled as the only efficient way of economic organisation, and notions of common interest and market regulation must be promoted and not brushed off as ‘bureaucratic’ or ‘socialist’.

september 21, 2011 / matthew beebeeDownload PDF

One thought on “The ‘Free Market’ Problem

  1. Pingback: Opinion: The ‘Free Market’ Problem | The Open Wall

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